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Equity risk

Use of the transitional measure on the equity risk

Overview of the measure

The Solvency II prudential regime introduces a solvency capital requirement (SCR) for insurance undertakings based on their risk profile as a whole, including financial risk. In particular, the risk of a decline in the value of equity investments gives rise to an “equity SCR”.

When calculated in accordance with the standard formula, the “equity SCR” corresponds to the loss of basic own funds that would result from a sudden decrease in the value of the equities held by the undertakings, defined as a maximum percentage (or “standard shock”) laid down in regulations for each category of equities.

To allow them time to adapt before fully applying the new provisions and to smooth the financial impacts over time, insurance undertakings using the standard formula are eligible for a transitional measure for calculating their “equity SCR”  All equities purchased before January 2016 are eligible to this measure, whether they are owned directly or through investment funds, providing they’re not already subject to the duration-based equity risk calculation authorization.

This transitional measure consists of calculating the capital requirement for this risk based on a shock of 22% in the first year, subsequently increasing at least linearly to correspond to the standard shock of 39% plus the symmetric adjustment (type 1 equities) or 49% plus the symmetric adjustment (type 2 equities) by January 2023 at the latest. In practice, the resulting shock is as follows: (1 – a) × 22% + a × [39% or 49% + symmetric adjustment], where a is equal to 0% at the start of the transition period (2016) and 100% at the end of the transitional period (January 2023).

In principle, the transitional measure on the equity shock is applied by default and requires the undertakings to put in place certain organisational measures (see below). However, undertakings not wishing to use this measure may use the standard shock from 2016 onwards. In this case, they are not subject to these terms of application.

 

Regulatory references

The transitional measure on equity risk is laid down in point II of Article R.352-27 of the French “Code des assurances”, applicable to undertakings covered by each of the three codes, which transposes point 13 of Article 308 (c) of Directive 2009/138/EC, known as “Solvency II”. It is clarified in Article 173 of Delegated Regulation (EU) 2015/35, known as “Level 2”,  modified on September 2015.

“Type 1”  and "Type 2" equities are defined in Article 168 of the delegated regulation. The “standard” shock level is defined in Article 169 and the “reduced” shock level in Article 170. The symmetric adjustment is defined in Article 172.

Organisational requirements for undertakings using the transitional measure are laid down in the draft Implementing Technical Standard (ITS) on the transitional calculation of equity risk (available in a provisional version from EIOPA’s website).

 

Authorisation procedure

Application of the transitional measure on equity shock does not require prior ACPR approval.

 

Terms of application

This transitional measure only applies to equities meeting the following criteria:

  • acquired directly by the undertakings no later than 1 January 2016, or indirectly where the undertakings has made an investment no later than 1 January 2016 in shares of open-ended investment companies or units of mutual funds
  • not subject to the duration-based calculation of equity risk

Undertakings using the measure must also implement organisational measures to:

  • formalise the list of equities meeting the criteria and be able to identify them at each SCR calculation to which the transitional measure is applied;
  • retain evidence of the purchase date of the equities in question as long as the transitional measure is used;
  • provide this evidence to the ACPR on request.

 

Consequences for insurance groups

If an institution using this measure belongs to a group, the calculation of equity risk across the portfolio on a combined or consolidated basis takes into account the measure.

Updated on: 07/17/2017 16:33